The trap around the Fed continues to tighten.
While on one hand Yellen pretty much threw in the towel on the current rate hike cycle yesterday, admitting that the local economy is no longer the driving factor in setting rates and instead has been relegated to the market’s every whim, moments ago the latest May CPI came in, and it showed that core inflation continues to overshoot.
Headline CPI rose 0.2% in May, in line with expectations, and rose 1.0% Y/Y, modestly below the 1.1% expected, as energy prices still pressure headline inflation (but not for long as the base effect is about to emerge), it was core inflation ex food and energy that was the problem: rising 2.2% in May, this was above the Fed’s comfort zone of 2.0%, and remains driven by the all important rent and shelter category, which rose 0.4% in the past month.
The full breakdown of inflation in the month.
But now that energy prices are again rising, it was all about the red hot core inflation: “The index for all items less food and energy increased 2.2 percent over the past 12 months. Over 60 percent of this increase is accounted for by the shelter index, which rose 3.4 percent over the span, its largest 12 month increase since September 2007. The rent index increased 3.8 percent over the past year, while the index for owners’ equivalent rent rose 3.3 percent and the index for lodging away from home advanced 3.8 percent.”
And some more details:
The index for all items less food and energy increased 0.2 percent in May, the same increase as in April. The increase was mainly due to a rise in the shelter index, which increased 0.4 percent in May, its largest advance since February 2007. The rent index rose 0.4 percent, while the index for owners’ equivalent rent increased 0.3 percent. The index for lodging away from home rose 0.7 percent after declining in March and April. The medical care index increased 0.3 percent, with the index for physicians’ services rising 1.0 percent and the hospital services index increasing 0.7 percent, but the prescription drug index falling 0.4 percent. The apparel index also rose in May, increasing 0.8 percent after falling in March and April. The index for motor vehicle insurance rose 0.9 percent in May following a 1.2-percent increase in April. Also increasing in May were the indexes for personal care (0.4 percent), education (0.3 percent), and tobacco (0.2 percent).
Several indexes declined in May, including used cars and trucks, which fell 1.3 percent, its largest decline since March 2009. The communication index fell 0.4 percent in May, and the index for household furnishings and operations decreased 0.3 percent, its third straight decline. The index for airline fares fell 1.5 percent after rising 1.1 percent in April. The new vehicles index fell 0.1 percent in May, as did the index for alcoholic beverages.
And the one chart which is of biggest concern to the Fed right now: rapidly rising rent and shelter inflation.
Indicatively, the last time rent inflation was this high, the Fed Funds rate was 4.9%.
But while rent inflation is already here, a far bigger problem for the Fed will emerge in just a few months when gasoline prices will anniversary their 2016 lows and proceed to push headline inflation substantially higher. So high in fact that as BofA calculated several weeks ago, should wholesale gasoline hit $2.06, CPI will rise as high as 3.5% by December.
At that point the Fed will have no choice but to hike. But will it be able to? If yesterday’s FOMC announcement is any indication, the answer is no.
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